Chapter 1

Question 1

What are the general-purpose financial statements?

Answer 1

Balance sheet, income statement, statement of cash flows, statement of stockholders’ equity. Provide the most useful info as possible at the least cost.

Question 2

Objective of financial reporting

Answer 2

to provide financial info about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors.

Question 3

Entity Perspective

Answer 3

companies are viewed as separate and distinct from their owners

Question 4

Decision-usefulness

Answer 4

provides info that is useful for making decisions

Question 5

accrual-basis accounting

Answer 5

a company records events that change its financial statements in the period in which the events occur

Question 6

Parties involved in standard-setting

Answer 6

1. Securities and Exchange Commission (SEC)
2. American Institute of CPAs (AICPA)
3. Financial Accounting Standards Board (FASB)

Question 7

SEC

Answer 7

Public companies send their financial statements and must adhere to GAAP; It is the enforcer.

Question 8

AICPA

Answer 8

American Institute of CPAs

Question 9

Committee of Accounting Procedure

Answer 9

created in 1939 by AICPA (at SEC urging); composed of CPAs; issued 51 Accounting Research Bulletins during 1939 - 1959.

Question 10

Accounting Principles Board

Answer 10

created by AICPA in 1959. Purposes: 1. advance the written expression of accting principles. 2. determine appropriate practices. 3. narrow the areas of difference and inconsistency in practice

Question 11

APB Opinions

Answer 11

Accting Principles Board pronouncements from 1959 - 1973.

Question 12

Wheat Committee

Answer 12

appointed by accting profession leaders in 1971. Created Financial Accting Foundation, Financial Accounting Standards Board, and Financial Accting Standards Advisory Council

Question 13

Financial Accting Foundation

Answer 13

Selects members of FASB and Advisory Council, funds their activities, and generally oversees activities.

Question 14

FASB

Answer 14

establish and improve standards of financial accting and reporting for the guidance and education of the public

Question 15

Differences between FASB and APB

Answer 15

Smaller membership
full-time, remunerated membership
greater autonomy
increased independence
broader representation

Question 16

Financial Accounting Standards Advisory Council

Answer 16

consults on major policy issues, technical issues, project priorites and selection and organization of task forces

Question 17

FASB Standards Statment

Answer 17

requires the support of 4/7 board members; considered GAAP once passed.

Question 18

Due Process System

Answer 18

how standards are set; 1. topic ID’d; 2. R&A; 3. public hearing; 4. board evaluates and issues draft; 5. board evaluates responses and issues final draft

Question 19

Types of Pronouncements

Answer 19

1. Standards, Interpretations, and Staff Positions
2. Financial Accounting Concepts
3. Emerging issues Task Force Statements

Question 20

Standards, Interpretations, and Staff positions

Answer 20

interpretations - modify or extend existing standards;

staff positions - provide interpretive guidance and also minor amendments to standards and interpretations

Question 21

Statements of Financial Accting Concepts

Answer 21

fundamental concepts used by the board to develop future standards (does not establish GAAP)

Question 22

Emerging Issues Task Force

Answer 22

people from every aspect (CPA firms, preparers, SEC, etc.); task force purpose is to reach a consensus on how to account for new and unusual financial transactions that may potentially create differing financial reporting practices

Question 23

Sarbanes-Oxley Act

Answer 23

increases the resources for the SEC to combat fraud and curb poor reporting practices; introduces sweeping chages to the institutional structure of the accounting profession;

1. Established Public Company Accting Oversight Board (PCAOB). has oversight and enforcement authority and establishes auditing, quality control, and independence standards and rules
2. Implements stronger independence rules for auditors
3. Requires CEO’s and CFOs to personally certify fin statements (forfeit bonuses & profits when there is an accting restatement)
4. requires audit committees to be comprised of independent member and members with financial expertise
5. Requires code of ethics for senior financial officers